Key Highlights

• Governor Bullock said it is critical to stop high Inflation expectations becoming embedded in pricing decisions.

• The Governor said the decision was not driven by the direct impact of oil prices on inflation.

• Deputy Governor Andrew Hauser argued that public trust is part of how Monetary Policy works.

• Business surveys on expected inflation form part of the RBA's evidence.

Michele Bullock was clear that November's rate rise was not aimed at oil prices; the target was something harder to see – the risk that high inflation becomes built into how Australians set prices and wages.

At first glance, the Reserve Bank of Australia's November decision looks like a response to an energy shock. Its forecasts assume a much higher oil price than three months earlier, and headline inflation is expected to climb before it falls. Yet at her media conference on 3 November, Governor Michele Bullock went out of her way to separate the two: "we are not tightening monetary policy because of the direct impact of oil prices on inflation." The reason for the rise, she said, lay elsewhere: "It is critical that we stop expectations for high inflation from becoming embedded in price-setting decisions".

Why a Central Bank would look past oil

Bullock's reasoning starts from a simple limit: "Monetary policy cannot impact global oil prices." The cash rate, which the Monetary Policy Board lifted by 25 basis points to 4.85 per cent, influences domestic borrowing, spending and demand. It does not set the price of Crude Oil in world markets.

The scale of the energy shock is nonetheless large. The November Statement on Monetary Policy (SMP) says: "The assumed oil price in the December quarter is 35 per cent higher than assumed in August". Further out, oil is "assumed to be 11 per cent higher by end-2028 than assumed in August."

A rise in fuel costs feeds into inflation directly – at the bowser and through transport and production costs. A central bank cannot prevent that first-round effect. What it can try to influence is what comes next.

The concern Bullock described is often called a second-round effect. When households and businesses see prices rising quickly, they may begin to expect that to continue. Firms may lift their own prices more readily, pass on cost increases more fully, or build higher inflation into contracts. Workers and employers may Factor it into pay negotiations. If enough decisions are made on the assumption that high inflation will persist, the expectation can become self-fulfilling.

That is what "embedded in price-setting decisions" refers to. A temporary jump in fuel prices becomes a lasting rise in the general inflation rate, even after oil stops climbing.

Bullock's summary of the trade-off was blunt: "Some pain now will prevent even worse pain down the track."

What the forecasts show

The RBA's forecasts help explain why the Board judged the risk worth acting on. Headline inflation was 3.9 per cent over the year to the September quarter, while the monthly CPI indicator recorded 4.3 per cent for the September month. Trimmed mean inflation, the underlying measure that strips out the largest price movements in either direction, was 3.7 per cent over the year to the September quarter.

The SMP states: "Headline inflation is expected to peak at 4.5 per cent in the December 2026 quarter". More telling for the expectations argument is the underlying measure. Trimmed mean inflation is forecast at 3.6 per cent in December 2026 and 3.5 per cent in June 2027, against 3.3 per cent and 3.0 per cent forecast in August. The overview says "Headline and trimmed mean inflation are now expected to remain above 3 per cent until end-2027".

The upgrade to trimmed mean matters because underlying inflation is less directly driven by volatile items such as fuel. A higher underlying path suggests price pressures broader than energy alone – exactly the territory where expectations can take hold. The Board's statement put it plainly: "Inflation is now forecast to remain elevated through much of 2027".

Evidence that expectations matter

Two days after the decision, Deputy Governor Andrew Hauser developed the theme in the Sir Leslie Melville Lecture at the Australian National University. He argued that public trust in the central bank is part of how policy works: "So trust isn't just a source of legitimacy – it's integral to how monetary policy actually works."

Hauser pointed to a concrete example. A Macquarie University Business survey found that firms expecting a faster return to target planned to pass on less of their Middle East conflict-related costs. In other words, businesses that believed inflation would come down were less inclined to raise their own prices in response to the shock – the opposite of the embedding process Bullock warned about.

The RBA's Community Research Survey, which has surveyed 12,000 Australians across four waves since February 2025, found about 55 per cent had "high" or "moderately high" trust in the RBA in its latest wave in September 2026. Hauser noted: "Strikingly, our overall trust measure has been broadly stable, or even slightly up, over the past 18 months." But he also cautioned: "A reserve of trust is not a licence to disappoint."

Read together with the Governor's remarks, the message is that credibility gives the RBA some room, but only while households and firms believe it will act if needed.

A divided Board on the same question

The decision was not unanimous. Six members voted to increase the cash rate, while three voted to leave it at 4.60 per cent. The Unemployment rate rose to an average of 4.6 per cent in the September quarter and is forecast to rise "to a bit over 5 per cent by end-2028".

What the majority view does make clear is the priority. In the Governor's words: "Returning inflation to target is our priority, and we will do what is necessary to achieve that."

The bottom line

The November rise was framed not as an attempt to counter dearer fuel but as insurance against a more persistent problem: high inflation becoming a habit in how prices and wages are set. Oil prices are beyond the RBA's reach, but expectations are not, and the upward revision to underlying inflation gave the Board reason to act. Survey evidence cited by Hauser suggests firms that trust inflation will fall behave differently – which is why the RBA sees credibility, and the willingness to accept "some pain now", as central to its task.